Sunday, June 01, 2008

Stock Market Update 01 June 2008

Since my last update of 07 May the markets have done very little (07 May the DJW Index closed at 292.09, 31 May the DJW Index closed at 290.85). Over this period a correction took place (as I anticipated) and a small recovery is currently taking place. See my previous post should you have any questions as to what my thoughts were at that time.

Year-to-date, here are the performance figures for the various funds I participate in within the Provident Fund:

Current holdings:

Fidelity Australian Dollar Fund: +2.53%
Fidelity Euro Fund: +1.36%
Fidelity International Bond Fund: +2.97%

Ongoing Purchases:

Fidelity International Fund: -4.06%
Blackrock/MLIM Equity Fund: -6.57%
Russell Global 90 Fund: -3.67%

As readers are aware, I have been in the Bond Fund and Australian/Euro currencies for some time. As such, my core holdings have risen in value year-to-date.

Just to reiterate my investment strategy for those who are new to the blog, I using technical analysis to move my core holdings amongst stocks, bonds and currencies to enhance/protect their value and invest my monthly Provident Fund contributions 100% in equities at all times (divided 40% Russell Global 90, 30% Blackrock/MLIM Equity and 30% Fidelity International Fund).

This investment strategy is known as "dollar cost averaging". For further, see my previous post on this subject or "goggle" it for further details:

http://emiratescapitalassetmanagement.blogspot.com/2008/01/monthly-investment-strategy.html

As of the end of May, the markets sit in a very unusual position. While there are signs of strength, there are also disconnects within the market that tell me all is not well. More on that below.

The first chart is the Dow Jones World (DJW) daily line chart (click all charts to enlarge):



The key points are:

Bullish:

-the short term bullish signal from 01 April is still intact as the red DI- line has not crossed above 60,
-the Relative Strength Index (RSI 14) broke the uptrend line but has reversed and remains above 50,
-price remains above the 50 day moving average (50DMA) @ 284.99 and the 50 dma itself is in an uptrend,
-the MACD remains above zero and, while it is downtrending, there are signs on the histogram (the blue bars on the MACD) that the downward momentum is decreasing, and
-both the Slow Stochastic and Stochastic/RSI are oversold and appear to be reversing upwards.

Bearish:

-price broke the uptrend line established from the April 01 bottom (but it must be noted the slope of the uptrend line was unsustainable and in need of a readjustment anyway), and
-the price was able to push as high as 297.19 but has been turned back by the 61.8% Fibonacci level (at 297.72). This is a potentially very bearish development as a break above this level would have signaled the downtrend was done as far as Elliot Wave analysis is concerned. As such, there is still the possibility we head lower from here.

Overall call this chart Bullish.


Next chart is the short term DJW 1-box Point & Figure (PNF) Chart:



Price went short term bullish on a break above 272 and remains bullish. Currently projects to 329 for a target (for new subscribers, see previous posts on targets; they are useful for direction and "strength of move" but not in predicting specific price levels).

This chart is Bullish.


Next chart is the intermediate term DJW Traditional Point & Figure (PNF) Chart:



This chart went bullish on a price break above 284 and currently projects a target of 364.

Currently Bullish.


Next chart is the DJW weekly line chart:



The key to note here is price fell out of the long established uptrending channel in the first week of Jan/o8 and appears to have formed a fairly well defined downtrending channel. Note price returned to backtest the upchannel and failed followed by the start of a new decline (backtests of previous trendlines is a common occurrence before a resumption of the downtrend).

Currently it appears price has hit the top of the channel and is reversing downwards. This could take us down to the bottom of the channel near 250. Supporting this is the fact the Slow Stochastic is in overbought territory on the weekly chart and appears to be reversing downwards. However, the weekly MACD has nicely recovered and appears to be moving above the zero line. This would be a bullish development.

Overall this chart is Neutral and too early to call.


Next chart is the longer term 10 year weekly chart:



The bearish sell signal was generated when the 13 week moving average crossed below the 34 week moving average. As of today the 13 week has not crossed above the 34 week average (285.92 vs 286.85) so it still Bearish.


Next chart is the Monthly candlestick chart:



As noted, at the end of May the closing price did not get above the 12 month moving average (closed @ 290.85 vs the 12 ma @ 294.66). It did try to get above the average inter-month (as indicated by the "pin" that goes above the average) but in order to turn this chart bullish it would need a monthly close above the 12 ma.

For the month of May this chart remains Bearish.


So that is how the market looks to date. It can be seen that there is a general bullish landscape in the short-mid term but the longer term charts are still bearish.

It appears to me we need to have a bit more of a correction in price (which I expect over the next week or so) before another drive upwards. The key I will be watching is the 297.72 price level as a close above this price would take us above the 61.8% Fib level. This would also result in a breakout of the downtrending channel I spoke about on the 4 year weekly chart. If this were to occur, it would be a very bullish development and would persuade me to start dipping a toe back into equities.

In line with this, my bond timing signals (not shown) have turned negative (which is bearish for bonds but bullish for stocks). As such, if/when this change occurs I will be moving money out of the bond fund and into equities.

Over the longer term, there are signs all is not well (as I mentioned at the open). My biggest concern right now is the health of the U.S. financial companies (banks and brokers).

Historically these stocks have been the leaders in the market due to their huge weighting in the indexes. As the U.S. has gone from a manufacturing base to a financial base over the years, the importance of financial stocks cannot be overstated. To a large extent, the U.S. does not make "things" anymore; they now make "financial instruments". As such, the financials are by far the single most important "industry" in the U.S. So........when the banks and the brokers are doing well; everyone is doing well. When they are not.........hmmmm.

Having said that, here is what I am worried about:

First chart is the Broker/Dealer Index. This chart tracks the performance of the majority of the major stock brokerage houses in the U.S.



This chart looks bad; no other way to say it. The key negatives are:

-unable to break above its 100 day moving average since the meltdown began last July,
-a well established downtrend line, and
-a series of Lower highs, lower lows.

Until this turns around I think it is still too soon to call a bottom and the start of a new bull market. What would turn me "market bullish" would be a break above the downtrend line/the 100 dma along with a price close above 185.12. This would negate the downward price pattern and turn things bullish.


Next chart is the Banking Index. It contains all the major banks operating in the U.S.



How are the banks doing? You don't have to be a technical analyst to see this one.

Right at the bottom of a support line that has held since Jan/2008. It has tried to break this level 4 times and has been unable to get through on a closing basis. From a "glass half full" point of view, this is a good sign and should this level hold it would be bullish for stocks. But from a "glass half empty" point of view, the market would not be testing these low levels multiple times if the banks were in good shape (see my previous blog for comments on the banks); in fact they would be breaking out to new highs. So this chart tells me "something is up". And that something is not good.

Until this chart gets above the downtrend line and the 100 dma, it still makes me nervous.


Last chart is the Financial Select Sector chart (essentially a mix of banks, brokers, finance companies, mortgage companies, etc).



Also not looking too shiny. Bouncing off support at the 24.41 level; a break of this level on a closing basis as well as a break of the shallow uptrend line would be bad news.

In short, the stock markets will go nowhere until the banks and the brokers strengthen. Until then any movements in the general indexes should be regarded as suspect.


Bottom Line:


My positions remain unchanged:

Fidelity International Bond Fund: 50%
Fidelity Australian Dollar Fund: 25%
Fidelity Euro Currency Fund: 25%

As mentioned, depending on what happens next week, I may move some money out of bonds and into stocks. Any changes I make will be blogged immediately.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

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